ASSIGNMENT 2.

1
The Consumer Credit Report is a monthly release from the Federal Reserve Board that estimates
changes in the dollar amounts of outstanding loans to individuals, funds which are mainly used to
purchase consumers goods. Loans backed by real estate, such as home equity lines of credit (HELOCs),
are not included in the survey.From this report the amount of US total consumer credit outstanding is
considered a good indicator of the potential future consumption spending levels and it is closely watched
by policy-makers, firms and investors.
In this paper we use the quarterly observations on US total consumer credit outstanding over the period
1951Q1-2014Q4. First we apply the Augmented Dickey-Fuller test to examine the possible presence of a
unit root. Furthermore we estimate several AR models to examine which model(s) are preferred by the
Akaike Information Criterion and Schwarz Information Criterion. After specifying an AR(2) model with
deterministic trend we analyze the residuals and finally we construct one-step ahead forecasts using both
a static sample period and a moving window sample period.
2.1.a) The time series of quarterly (log) new orders shows a clear upward
trend (interrupted by short periods of sharply declining levels around economic recessions).
Given this property of the time series, we include a Trend and intercept
in the regression model that is used for the Dicky-Fuller test.
Applying the Schwarz Information Criterion for automatic selection of the lag length
(which produces the result that three lagged first differences are included), gives an
estimate of the coefficient on the lagged level yt-1 equal to -0,025838, with a DickeyFuller t-statistic of -4,027531. The corresponding p-value is equal to 0.0092 such that
We reject the null hypothesis of a unit root in this series even at the 1%
significance level.
On the other hand, applying the Akaike Information Criterion for
automatic lag length selection suggests to include eleven lagged first differences.
This gives an estimate of the coefficient on the lagged level yt-1 equal to -0.24204, with a Dickey-Fuller
t-statistic of -3.154946. The corresponding p-value is equal to 0.0996, so in this case we can onlu reject
the null hypothesis of a unit root at the 10% level. Hence, it seems that the null hypothesis of a unit root is
only rejected once at the 5% level.
Rejecting the null-hypothesis twice is a strong indication (even at the 10% level) that we are dealing with
a deterministic trend.
2.1b) The values of the Akaike Information Criterion (AIC) and Schwarz
Information Criterion (SIC) for AR(p) models for p = 0, . . . , 4 are as follows:

AIC

SIC

AR(0)
AR(1)
AR(2)
AR(3)
AR(4)

-1.852676
-5.713148
-6.628464
-6.654854
-6.663640

-1.822215
-5.667311
-6.603711
-6.623810
-6.571087

AIC achieves minimum value for the AR(4) model, however SIC achieves minimum value for the AR(3)
model. Hence the criteria do not agree on the preferred model.
2.1.c)
Estimating an AR(2) model
yt = + t + 1yt-1 + 2yt-2 + t
for the series of quarterly log new orders yt by least squares gives estimates 1 = 1.748(0.043) and 2 =
-0.768(0.042), with standard errors in parentheses. Note that 1 + 2 = 0.979792, which is fairly close
to 1, suggesting the possible presence of a unit root.
The AR(2) polynomial 2(L) has two non-real roots,
Inverted AR Roots

.87-.07i

.87+.07i

The residuals from the AR(2) model have skewness equal to 0.108 and kurtosis equal to 5.60. The JarqueBera test statistic has a value 62.94, with p-value 0.000. Hence, we reject the null hypothesis that the
residuals are normally distributed at conventional significance levels. The residuals have a skewness of
virtually zero, which corresponds with a normal distribution. We however do observe substantially more
residuals close to the mean of zero than expected under normality, which also contribute to the excess
kurtosis of roughly five ( instead of three, which would be expected for a normal distribution).
RESID
100

80

Density

60

40

20

0
-.05

-.04

-.03

-.02

-.01

.00

Histogram

.01

.02

.03

.04

.05

Normal

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Arend, kan jij hier de grafiek maken met blauwe balken zoals in de vorige opdrachten?
Die de recessies aangeven zeg maar.

The residuals still show signs of autocorrelation: several of the estimates k for

k = 1, . . . , 36 are significantly different from zero at the 5% significance level; for example the 3 rd and
10th autocorrelation with respectively AC values of 0.236 and -0.283.
For the squared residuals, the first autocorrelation is equal to 0.207 and significantly different from zero at
the 5% level. So are the 10th and 11th autocorrelation, with respectively the values 0.168 and 2.10.
However, it is doubtful whether this really should be interpreted as a sign that the time series is
heteroskedastic, as it might also be caused by a few large squared residuals in consecutive quarters.
Performing a Serial Correlation LM test on the squared residuals yields a Chi-Square(2) value of
13.44253, the responding p-value is 0.0012, which is well below the 5% significance level. And thus
rejecting the null-hypothesis of homoscedasticity.

Appendix
Resid

Resid^2